Sept 1 (Reuters) - At least a dozen U.S. private equity
firms have been subpoenaed by the New York state attorney
general as part of a probe into whether a widely used tax
strategy that saved these firms hundreds of millions of dollars
is proper, a source familiar with the situation said on
Saturday.

Bain was once headed by Mitt Romney, the Republican
candidate who hopes to unseat President Barack Obama in the Nov.
6 election.

The subpoenas, which were sent out in July, seek documents
related to the conversion of fees these private equity firms
charge for managing investors' assets into fund investments, the
source said. This means the investigation predates the release
last month of confidential Bain fund documents by Gawker that
revealed such a practice.

The practice is known as a "management fee waiver." As fund
investments, the income would be taxed as capital gains, which
attract rates around 15 percent. Without the conversion, the
fees would be ordinary income, taxed at rates around 35 percent.

Jennifer Givner, a spokeswoman for New York Attorney General
Eric Schneiderman's office, declined to comment. The firms were
not immediately available for comment.

The investigation comes in the midst of a heated U.S.
presidential election campaign. Romney has been scrutinized for
his tenure as head of Bain, through which he amassed much of his
estimated $250 million fortune.

The timing of the probe and Schneiderman's credentials as a
Democrat could raise eyebrows in political circles.

Romney's record at Bain is already a target of attack by
President Barack Obama's campaign and has put an uncomfortable
spotlight on the industry. A probe into a potential tax dodge by
the industry could further play into the Democrats' hands.

Romney earned about $13 million in income over the past two
years from carried interest, or the portion of a private equity
fund's profits that goes to its managers, according to his
campaign, which has issued a statement denying that he ever
profited from using a management fee waiver.

With the latest probe, Schneiderman, who has been in office
for less than two years, follows in the footsteps of
predecessors Andrew Cuomo and Eliot Spitzer, who played the role
of sheriff of Wall Street.

Schneiderman, who is co-chair of a mortgage crisis unit
under Obama, has looked into mortgage practices at banks. Other
high-profile cases involving financial institutions include an
investigation of possible manipulation of the Libor benchmark
international lending rates by banks.

The tax probe is being conducted out of the New York
Attorney General's Taxpayer Protection Bureau, which was set up
in early 2011. The agency was established "to root out fraud and
return money illegally stolen from New York taxpayers at no
additional cost to the state," according to the AG's website.

In April, the AG's office also sued Sprint Nextel Corp
for more than $300 million, accusing the company of tax fraud by
deliberately not collecting or paying millions of dollars of
taxes for its cell phone service.

ALIGNMENT OF INTEREST

Private equity firms sometimes grant investors a waiver of
their management fee - typically charged at 1-2 percent of
investments - in exchange for being able to use that capital as
their own investment income in the fund.

The benefit for the investor is recouping its fee, while the
fund manager gets extra incentive to make the fund perform well
but is also taxed less on this money.

The Internal Revenue Service has so far not banned such a
practice, which some private equity fund managers argue is done
to align their interests more with those of their investors
rather than to reduce taxes.

They point out that money that is secure for the fund
manager as a management fee is being converted into carried
interest, which is far from guaranteed.

The New York Times first reported news about the Attorney
General's p robe.

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